Department of Energy and Climate Change: Offshore electricity transmission-a new model for infrastructure - Public Accounts Committee Contents


Conclusions and recommendations


1.  It is doubtful that this elaborate new licensing regime for offshore electricity transmission will deliver any savings for consumers. The new regime involves the regulator choosing transmission providers. This is more elaborate than alternative approaches, such as that used in oil and gas where production companies make their own arrangements for transmission, or using an existing onshore transmission company such as National Grid. We have not seen convincing evidence to show that there will be savings for consumers from this scheme compared with potential alternatives. Indeed the new system could well lead to higher prices for consumers. In applying the regime for future licences, the Department and the Authority should:

  • show clearly how the regime is expected to produce better outcomes than alternative approaches; and
  • introduce a rigorous system of evaluation to confirm whether projected savings are achieved.

2.  There are fundamental weaknesses with the model applied to the first licence competitions. The terms of the licences awarded look too generous for the limited risks investors are being asked to bear. The licences awarded to date did not include any construction risk yet they provide licensees with a guaranteed retail price index-linked income for 20 years regardless of the extent to which the assets are used. At the same time operators can only be fined a maximum 10% of their expected income in any one year if they fail to ensure their facilities are available and working. Furthermore, investors are not required to share any gains made from debt refinancing or excessive equity profits. The Department and the Authority argued that these terms were not overly generous as there was price competition, but did not produce evidence to demonstrate that these are the terms that offer the best prices for consumers. For future licences and, where appropriate, licences already being competed, the Authority should:

  • require investors to provide transparency over actual returns including those from sale proceeds, and to share gains from debt refinancing and excess equity profits;
  • reconsider whether a revenue stream linked to the retail price index offers better value for money for consumers than alternatives such as a flat or partially indexed revenue stream;
  • assess the benefits and risks of continuing with guaranteed income for 20 year licence periods compared with shorter licence periods or more regular price reviews within each licence period; and
  • consider higher penalties beyond the current 10% annual cap for failure to make assets available.

3.  The licencing system relies on effective competition to keep down prices for consumers but it is not clear that a diverse and competitive market has been created. The Department and the Authority are seeking to develop a competitive market for offshore electricity transmission in contrast to the onshore monopolies. But the first six licences have been won by just two companies. The PFI market has also shown that even where there is a diverse market initially, there may be consolidation as the first investors sell to a smaller group of long-term investors. The Authority should monitor the offshore transmission market and should refer the market to the Competition Commission if consolidation by a few companies undermines competition.

4.  It is unacceptable that HM Treasury have allowed the Department and the Authority to proceed with the new regime without incorporating lessons from previous government experience on PFI. Lessons learnt from the PFI market, such as the sharing of refinancing gains, have not been incorporated into the new offshore electricity transmission market. HM Treasury's argument of not wanting to introduce any limitations on investors is concerning given that it used a similar argument with early PFI deals, only to reverse its position later. HM Treasury should be alert to any part of government setting up a new market, and make sure they learn from previous experience.


 
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Prepared 14 January 2013